SPPTChap006 - Robert Cascio, PhD
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Transcript SPPTChap006 - Robert Cascio, PhD
Chapter 6
Business Strategy:
Differentiation, Cost Leadership, and Integration
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Chapter Outline
6.1 Business-Level Strategy: How to Compete for Advantage
• Strategic Position
• Generic Business Strategies
6.2 Differentiation Strategy: Understanding Value Drivers
6.3 Cost-Leadership Strategy: Understanding Cost Drivers
6.4 Business-Level Strategy and the Five Forces: Benefits and Risks
• Cost-Leadership Strategy: Benefits and Risks
• Differentiation Strategy: Benefits and Risks
6.5 Integration Strategy: Combining Cost Leadership and Differentiation
• Value and Cost Drivers of Integration Strategy
• Integration Strategy Gone Bad: “Stuck in the Middle”
6.6 The Dynamics of Competitive Positioning
6.7 Implications for the Strategist
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ChapterCase 6
©Diego Giudice/Corbis
P&G’s Strategic Position Weakens
Procter & Gamble (P&G), a differentiated firm, with 22
iconic brands, and $85 B Revenues
Current problems stem from strategic decisions made by
former CEO, A. G. Lafley:
1.
2.
P&G’s $57 billion acquisition of Gillette
U.S.-centric focus – emerging markets to competitors
2009 – CEO Robert McDonald installed
2013 – Directors brought back A. G. Lafley as CEO
Differentiation Strategy = Perceived Value & Premium Pricing
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6.1 Business-Level Strategy: How to
Compete for Advantage
BUSINESS-LEVEL STRATEGY
The goal-directed actions managers take in their quest
for competitive advantage when competing in a single
product market
Who – which customer segments – will we serve?
What customer needs, wishes, and desires will we
satisfy?
Why do we want to satisfy them?
How will we satisfy our customers’ needs?
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Exhibit 6.1 Industry and Firm Effects
Jointly Determine Competitive Advantage
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6.2 Differentiation Strategy:
Understanding Value Drivers
Product Features
• Most important & clearest drivers
• Unique product features >> higher price
BMW M3
Customer Service
• ID unmet customer needs & satisfy them
Zappos online retailer
Ritz-Carlton
Complements
• Add value when consumed as a bundle
AT&T U-verse with a DVR add-on
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Strategy Highlight 6.1
Trimming Fat at Whole Foods Market
Whole Foods had lost its competitive advantage due to a
failure to control costs effectively.
Trim the fat:
• Champion healthy living by offering natural and organic food
choices, while also educating consumers
• Increase private label by 5% to include over 2,300 products
A clearly formulated business strategy enables Whole
Foods to increase the differentiation value gap and
command premium prices, while keeping its cost structure
in check.
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6.3 Cost-Leadership Strategy:
Understanding Cost Drivers
A Cost-Leadership
Strategy With
Adequate Value
• Managers can
manipulate cost
drivers to keep their
costs low.
Cost Drivers
• Cost of input factors
• Economies of scale
• Learning-curve
effects
• Experience-curve
effects
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Exhibit 6.4 Cost-Leadership
Strategy: Achieving Competitive Advantage
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Strategy Highlight 6.2
Ryanair: Lower Cost than the Low-Cost Leader!
Ryanair has unbundled air travel to its extreme.
More than 20% of Ryanair’s revenues flow from
ancillary services: premium-rate phone line to contact
them, checked bags, checking in, pillows, blankets,
water.
Ryanair offers the basic service (air travel only) for a
low price, but charges a steep premium for all other
items and upgrades.
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Economies and Diseconomies
of Scale
Economies of Scale – output up, cost per unit down
• Spread fixed costs over large output
Microsoft upfront R&D for Windows upgrades
• Specialized systems
ERP software or robots
• Physical properties
Cube-square rule for "big box" stores
Minimum Efficient Scale (MES)
• Lowest cost position constant returns to scale
Diseconomies of Scale
• Complexity of management or physical limits
Gore Associates and aircraft aeronautics
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Cost Drivers: Learning & Experience
Curves
Learning Curves
• Steeper curve = more learning
Aircraft manufacturing
Cardiac surgeons
Experience Curves
•
•
•
•
Combine economy of scale & learning curves.
Scale comes down a given learning curve.
Technology allows movement to steeper curve.
Combination can leapfrog in competitive advantage.
Walmart high volumes & technology leadership
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Exhibit 6.6
Gaining Competitive Advantage
Through Leveraging Learning & Experience Curve Effects
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6.4 Business-Level Strategy and the
Five Forces: Benefits and Risks
Cost-Leadership
Benefit: protected
from competitors if
price war
Risk: new entrant
arrives and new
capabilities needed
Differentiation
Benefit: reduced
rivalry & high cost of
imitation
Risk: might overshoot
features needed &
vulnerable to pricesensitive customers
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6.5 Integration Strategy: Combining
Cost Leadership and Differentiation
Firms skilled in both lowering costs and uniqueness
Difficult because the firm manages internal value chain
activities that are fundamentally different from one
another
Integration can work if investments are not substitutes
but rather complements.
• Providing important spill-over effects
The goal of an integration strategy is a larger economic
value (V − C) than that of rivals.
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Exhibit 6.8 Integration Strategy vs.
“Stuck in the Middle”
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Exhibit 6.9
Target’s Attempt at Achieving
Competitive Advantage by Pursuing an Integration Strategy
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Value and Cost Drivers of
Integration Strategy
Quality
Can increase perceived value & lower cost (V − C)
Economies of Scope
Starbucks adding hot tea to its menu
Customization
BMW, Threadless.com, Toyota all mass customization
Innovation
IKEA - stylist furniture in flat pack delivery
Structure, Culture, & Routines
Ambidextrous organization – Intel
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Exhibit 6.10 Value and Cost Drivers
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6.6 The Dynamics of Competitive
Positioning
Strategic Positions Need to Change over Time
• PC assemblers need to move to tablets or smartphones
Productivity Frontier
• Value-cost relationship
• Captures the best practices at a point in time
PC Industry
2010 – Apple was a differentiator; HP & Lenovo were “stuck in
middle.”
2013 – Lenovo was a differentiator in laptops and desktops, HP still
has problems with software transformation, Apple seems to be
moving into lower-end products and toward an integration strategy.
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6.7 Implications for the Strategist
Well-formulated and implemented strategies =
Enhanced chances of superior performance
Integration strategies successful only if:
• An innovation that reconciles the trade-offs, such as Toyota
lean-manufacturing approach in ‘80s & ‘90s
Goal is to stay on the productivity frontier.
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ChapterCase 6
©Diego Giudice/Corbis
Consider This…
• P&G generally charges a 20–40% premium for its
products, reflecting higher value creation, consistent
with its differentiation strategy.
• Recently, P&G lost market share because of its higher
prices, and its profit margins have also been squeezed by
rising costs of input factors.
• P&G has slashed its R&D spending in recent years by as
much as 50% in an attempt to bring in more innovation
from the outside through its Connect+Develop initiative.
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